Hudgins v. Kemp (61 U.S. 45)

THIS was an appeal from a decree of the Circuit Court of the United States for the eastern district of Virginia. The bill was originally filed in the Circuit Court by Edmund Christian, general assignee in bankruptcy in said district, on the 19th of May, 1845; and upon his death, Wyndham Kemp was appointed assignee, on the 12th of May, 1852, by the District Court. After that, Kemp prosecuted the suit.

On or about the 17th of February, 1843, John L. Hudgins filed his petition in the District Court of the United States for the eastern district of Virginia, praying that he might have the benefit of the act of Congress of August 19, 1841, to establish a uniform system of bankruptcy throughout the United States, and that he might be deemed and declared a bankrupt under said law; and the usual proceedings having been taken upon said petition, the said John L. Hudgins was, on the 20th May, 1843, duly adjudged and declared to be a bankrupt; and Edmund Christian, the general assignee in bankruptcy in said district, was thereupon duly appointed, by said court, the assignee in bankruptcy of said John L. Hudgins.

Other proceedings were had in the District Court, which it is not material here to mention.

On the 17th of May, 1845, the following points and questions were adjourned to the Circuit Court for decision:

1. Is the allegation of the objectors to the discharge of the bankrupt, that the deed executed by said John L. Hudgins, bearing date the 1st day of March, 1842, to Elliott W. Hudgins, conveying all the rest of his land in York, not conveyed by a previous deed of 6th September, 1839, is a fraudulent deed within the meaning of the bankrupt law, sustained by the evidence in this case?

2. Is the allegation of the objectors, that the deed executed by said John L. Hudgins to Houlder Hudgins, dated 19th July, 1842, stating a consideration of $4,000, is a fraudulent deed within the meaning of the bankrupt law, sustained by the proofs?3. Is the deed of the 21st February, 1842, in which John L. Hudgins conveys to Robert Hudgins, for an alleged consideration of $5,000, his tract of land in Matthews county, proved to be a fraudulent deed within the meaning of the bankrupt law?

4. Are the allegations of the objectors, that the petitioner concealed himself and his effects, so as to prevent the execution of process, and the deeds aforesaid were made for the purpose of eloigning and removing his property so as to defraud his creditors, shown to be true?

5. Whether it is proved that the said John L. Hudgins has not made a true and faithful schedule of all his estate and property, nor a full and true statement of all the debts due him?

6. Finally, whether the petitioner, on any or all of the above grounds, ought to be refused a discharge from his debts?

On the 19th of May, two days after the above questions had been adjourned to the Circuit Court, the assignee filed his bill in that court, alleging that the conveyances above mentioned were fraudulent and void, and praying that they might be set aside. The proceedings which took place thereupon are set forth in the opinion of the court.

On the 27th of June, 1855, the Circuit Court passed its final decree, confirming the report of the master, and ordering the property in question to be sold by the assignee. From this decree the defendants appealed to this court.

The case was argued by Mr. Lyons and Mr. Johnson for the appellant, and by Mr. Robinson and Mr. Patton for the appellees.

This being a case where much of the arguments was employed in the examination and comparison of evidence, only the points raised upon each side can be mentioned.

For the appellants:

I. There is no proof of any fraud upon the part of Robert Hudgins, but, on the contrary, the proof is clear and unquestioned, that he paid the cash price which his deed calls for, to John L. Hudgins, which, with the charges upon the property, amounted to its full value. Neither is there any proof of fraud in this transaction by John L. Hudgins.

II. There is an abortive attempt at such proof. But if it were shown by the clearest proof that John L. Hudgins had acted with the most covinous and fraudulent design in making his conveyance, that design would not affect Robert Hudgins, unless it was shown that Robert Hudgins participated in it, or, at the least, had knowledge of it. A purchaser of property for valuable consideration can never be affected, and have his title destroyed, because the vendor sold from a base motive-the motive to defraud his creditors-at least, unless he have knowledge of the motive.

III. Because a sale of property for valuable consideration, even by an insolvent, is not in fact or law a fraud upon any creditor who is merely a creditor at large, the fraud, if any be committed, consisting in the concealment or misapplication of the money arising from the sale; and no purpose was manifested or even entertained to defraud any judgment creditor, because the deed upon its face conveyed the property subject to the rights of the judgment creditor.

IV. Whether the deed was void as to creditors or not, it was good between the parties to it, and no decree should have been rendered, vacating the deed, and directing a sale of the property, until an account had been taken of the debts, for the purpose of ascertaining whether there were any unpaid and recoverable; and if, upon the report of such account, it appeared that there were such debts, the defendant, Robert Hudgins, had a right to redeem his land by paying them, or so much of the land might then have been sold as would satisfy them. It was error to sell the whole land, without first ascertaining that there were debts sufficient to absorb it, and without allowing the defendant the privilege of redeeming it.

V. Because the judgment creditors had no right to do more than extend the lands, unless it was shown, as it was not, that the profits would not in a reasonable time extinguish the debts. But they had no right, because by proof of their debts before the commissioner the lien of the judgment was extinguished.

VI. It was error to charge Robert Hudgins with rents and profits prior to the filing of the bill against him. Up to that time, he held and claimed the property as his own, as a purchaser for valuable consideration; and the utmost that the plaintiff could claim of him, would be the right of a judgment creditor, and his right to rents and profits is never extended retroactively beyond the filing of the bill; and in this case the error and injustice of the rule which has been applied to the defendant is most remarkable and obvious. The plaintiff charges that the conveyance to the defendant was fraudulent, and therefore he claims the right to recover of him the rent of the property in one case, and the profits in another, upon the ground that he has actually enjoyed the property in the one case, and received the profits in the other; and yet the plaintiff has taken testimony that the defendant did not occupy the property for which rent is charged, but John L. Hudgins did; and that is relied upon as evidence of the fraud. Now, it cannot be true that he did not occupy it, and therefore merely pretended to purchase it, and therefore has been guilty of a traud, and yet he did occupy it, and therefore is not guilty of a fraud, yet the decree practically affirms both.

And in respect to the profits. The defendant is charged with profits which there is no proof that he received.

VII. The plaintiff is seeking to recover debts, if he has any right at all, which were due primarily by Thomas Hudgins, for which John L. Hudgins was security. Thomas Hudgins, by his deed of the ___ day of _____, conveyed a large amount of property to trustees, for the benefit of those creditors, giving them priority over the other creditors who are also secured by the said conveyance. The creditors accepted the conveyance, and took under it. The court should have required them to account for the property conveyed by that deed, before it authorized them to take the property of John L. Hudgins, if the property in question was his, and still more, before it authorized them to take the property from another, who claimed it as purchaser for valuable consideration, and certainly held it by a title valid against John L. Hudgins.

The property thus conveyed may have been sufficient to satisfy all the debts, and they may have been paid; the answers express the belief that they have been; an account of the trust fund could only determine the point. By accepting the deed, and taking under it, the creditors assumed the responsibility of fairly accounting for the property conveyed; they cannot use, or hold subject to their use, the property of Thomas Hudgins, and yet claim that of John L. Hudgins, or his vendor, for the same debts.

VIII. The decree, which is final, takes no notice of the rights of Robert Hudgins, as against John L. Hudgins, and makes no provision for the restitution to him of the surplus which might remain of the proceeds of the sales of the property after satisfying the debts, although there may be such surplus; and if there shall be, Robert Hudgins is certainly entitled to it, because his title, if not good against the creditors of John L. Hudgins, is good against every one else.

IX. The court did not pass upon the exceptions to the depositions, and therefore admitted the testimony excepted to.

The following authorities were relied upon in the argument:

Shirley v. Long, 6 Rand., 736; Davis v. Turner, 4 Gratt., 422; Blow v. Maynard, 2 Leigh, 29; Fones v. Rice, 9 Gratt., 568; Ex parte Christy, 3 How., 292; Pettiplace v. Sales, 4 Mason C. C. R., 312; Hapkerk v. Randolph, 2 Brack. R., 132; Randall v. Philip, 3 Mason C. C. R., 378; Gregg v. Sayre, 8 Pet., 244; Clough v. Thompson, 7 Gratt., 26; 1 Story Eq., p. 364; 1 Story Eq., 588; Dorr v. Shaw, 4 John. Ch. R., 17; Smith v. Burton, 13 Pet., 464.

For the appellee:

1. The decree is right, and ought to be affirmed. The deed from Robert Hudgins to John L. Hudgins was contrived of fraud, with intent to defraud the creditors of the said John L. Hudgins of their lawful debts, and was therefore properly set aside in toto, under the Virginia act in 1 R. C., 1819, p. 372, c. 101, § 2; Chamberlayne, &c., v. Temple, 2 Rand., 395; Garland v. Rives, 4 ib., 282; Shirley v. Long, 6 ib., 735, and other cases cited in 1 Rob. Pract., old ed., 512, 554; and under the bankrupt act of 1841. Sands, &c., v. Codwise, &c., 4 Johns., 559, also 582 to 600; Codwise v. Gelston, 10 ib., 517; Arnold, &c., v. Maynard, 2 Story, 352; Hutchins v. Taylor, &c., 5 Law Reporter, 289; Cornwell's appeal, 7 W. and S., 311; McAllister v. Richards, 6 Barr, 133. For the assignee is not only vested by the law with all the rights of the bankrupt, but with the rights of creditors also. He may set aside a fraudulent conveyance of the bankrupt, which the bankrupt himself could not do. McLean v. Lafayette Bank, 3 McLean, 189, 587; McLean v. Malane, &c., ib., 199; McLean v. Johnson, &c., ib., 202; Everett v. Stone, 3 Story, 456; Peckham v. Burows, ib., 544; Freeman v. Deming, 3 Sandford's Ch. R., 332; Shauhan, &c., v. Wherritt, 7 How., 627; Buckingham, &c., v. McLean, 13 ib., 170.

2. There is no error as to the rents and profits. An account of rents and profits was decreed from the time of the act of bankruptcy, in Sands, &c., v. Codwise, &c., 4 Johns., 589, 600. On the same principle, it was proper here to decree rents and profits from the filing of the petition; for 'the act of bankruptcy in England is tantamount to a filing of the petition under our statutes.' McLean v. Malane, &c., 3 McLean, 200. The pendency of the petition is constructive notice thereof to the grantee in the deed. Morse v. Godfrey, & c., 3 Story, 391. If there was, before that time, a right in Robert Hudgins to let the avails or annual income be expended at his discretion, without responsibility to any one, there could be no such right afterwards, (4 Johns., 588.) Under the voluntary system, the assignee derives as much right to rents and profits from the petition and decree, as he derives under the involuntary system from the act of bankruptcy and the decree.

3. Even if the decree of the Circuit Court were set aside, there should be a decree against Robert Hudgins for the purchase-money remaining unpaid at the time of the bankrupt's petition, and the land held subject thereto, as well as to the liens of the judgment creditors of John L. Hudgins.

Mr. Justice NELSON delivered the opinion of the court.